2023-05-03 21:36:10 ET
Summary
- With almost 30% of global volume, Becle, aka Jose Cuervo, is the world’s largest tequila company.
- While it is attempting to diversify into other spirit categories, tequila still represents more than 66% (and increasing) of sales.
- Demand has far outpaced supply in recent years, which led to skyrocketing agave prices, and plummeting margins.
- Premiumization is a big growth driver in the industry, but Becle is not ideally positioned to benefit from this trend.
- I believe there is 25% upside available from current levels.
Profile
Becle, S.A.B. de C.V. ( OTCPK:BCCLF ), commonly known as Jose Cuervo, is one of Mexico’s oldest companies, with heritage dating back more than 250 years. Today - more than 11 generation later - the company is still under control of the Beckmann family, direct descendants of Jose Maria Guadalupe de Cuervo.
Becle, mainly via Jose Cuervo, is the undisputed king of the global Tequila market, but in recent years it has attempted to diversify into spirits like Irish whiskey (3 rd largest global producer by volume), Rum, Gin, Vodka, and ready-to-drink (RTD) cocktails. This is done both via internal development and inorganic growth.
One of Becle’s advantages is that it runs a completely vertically integrated operation. This includes agave cultivation, distilling, processing, packaging, maturation warehouses, distribution centers etc. It acts as a producer, wholesaler, and distributor of its products. Becle is the world's largest producer of Agave Azul , Tequila’s main raw ingredient. However, due to the volume of Tequila it produces, it is also the largest buyer of Agave.
JPMorgan reported in 2017 that Becle’s goal was to produce 90% of its own Agave requirement vs the 60% it produced in 2016/2017. They also reported that this could lead to a 5% improvement in gross margin. Over the last 7 years however, an Agave shortage caused by the burst in demand from the US, has led to their gross margin deteriorating by 7%.
Breakdown of Operations
The company’s operations can be looked at either by product line, or by their official operating segments, which is basically 3 geographic regions (US & Canada, Mexico, ROW). More data is provided in the latter format (cost basis per region etc.), and thus most of my modelling will also follow this format.
Breakdown by Operating Segment:
CAGR per operating segment over the last 5 years (2017 – 2022):
By Volume | By Sales | |
USA & Canada | 5.4% | 10.1% |
Mexico | 4.1% | 13.6% |
ROW | 13.3% | 18.1% |
Overall | 6% | 12% |
US & Canada
- 56% of global tequila volume (2022)
- Becle has 25.4% market share in this region (of which 18.7% is via Jose Cuervo).
- 60.1% of Becle’s revenue (2022), slight downward trend.
- 57.9% gross margin (2021)
- 27.9% segment profit margin, ex selling- & administration costs (2021)
- 68.2% contribution to consolidated segment profit, ex selling- & admin costs (2021)
Mexico
- 28% of global tequila volume (2022)
- Becle has 41% market share in the region.
- 23.9% of Becle’s revenue (2022), slight upward trend.
- 39.8% gross margin (2021)
- 21% segment profit margin, ex-selling & administration costs (2021)
- 16.4% contribution to consolidated segment profit, ex selling- & admin costs (2021)
ROW
- 16% of global tequila volume (2022)
- Becle has 30.3% market share in the region.
- 16.1% of Becle’s revenue (2022), upward trend
- 57% gross margin (2021)
- 30.1% segment profit margin, ex-selling & administration costs (2021)
- 15.4% contribution to consolidated segment profit, ex selling- & admin costs (2021)
From the above data, there is a clear distinction between the more mature Mexican market and the more “nascent” US and ROW markets. The difference in gross margin is close to 20%, with a difference of about 7-8% in segment profit margins.
Breakdown by Product Line:
This graph suggests that Becle’s diversifying strategies have not been particularly effective, and the company remains heavily dependent on the expansion of Tequila which represented 59% of total sales in 2017 and increased to 68% in 2022. I believe this is relevant and not a particularly great reflection on management given Becle’s disposal of a 50% stake in Don Julio (discussed later) and the reasons they provided for the move.
CAGR per product line over the last 5 years (2017 – 2022):
By Volume | By Sales | |
Jose Cuervo Tequila | 6.4% | 11.1% |
Other Tequila | 12.2% | 21.1% |
Other Spirits | 5.9% | 12.6% |
Non-alcoholic beverages (NAB) | -5.6% | -18.2% |
Ready-to-drink (RTD) | 11.6% | 11.1% |
Overall | 6% | 12% |
The above indicates that premiumization/pricing efforts have been successful in their spirits categories (which was 89% of total sales in 2022), but less so in the NAB and RTD markets where it seems they actually lost ground.
Industry Overview
ISWR believes the global spirits market has decreased at a CAGR of 2.9% in volume between 2015 and 2020. However, it increased at 5.5% CAGR in terms of sales. This points to premiumization across the board for the spirits industry. Statista estimates that the market will keep growing sales at a CAGR of about 6.3% through 2025.
Of most importance to Becle are the following:
- Tequila: Becle is #1 in the global tequila market, and via its portfolio has close to 30% market share, more than double the size of the second biggest player, Diageo (DEO).
- Whiskey: Via its portfolio, Becle is the third largest producer of Irish Whiskey, trailing Tullamore Dew and Jameson, though it should be noted that Jameson has a massive lead over competitors . (Around 8 mln cases vs Tullamore Dew at 1.5 million an Becle with 1 million)
Given that Tequila represents roughly 70% of Becle’s sales, most attention will be given to this segment.
The following salient points of the Tequila market provide some context :
- Tequila is produced by fermenting sugar extracted from the Agave Azul plant.
- Agave Azul takes roughly 7 years to grow to maturity. (can be longer – up to 15 years). This is a long process, not something that can be ramped up quickly.
- Like Champagne or Bourbon, Agave can only be grown in an area known as the Appellation of Origin Tequila (AOT), which is basically the state of Jalisco, and 4 other smaller areas in Mexico.
- Becle is the largest producer of Agave Azul in the AOT. (According to the Consenjo Regulador del Tequila – who “governs” the AOT)
- Tequila can be called as such when produced from at least 51% Agave, and bottling does not have to happen within the AOT, provided that it is bottled by a certified bottler that is approved by the Mexican minister of economy. The balance is usually distilled from sugarcane, which can be harvested annually. These are often referred to as mixto tequilas.
- 100% Tequila must be produced from 100% Agave. (i.e., literally requires double the amount of Agave), and bottled within the AOT.
- Measured by volume, Becle is more than twice the size of the next biggest tequila brand in the world.
Becle’s Tequila Portfolio:
The Jose Cuervo family represents about a third of Becle’s sales. Within the Cuervo family, Becle does not disclose the specific sales volume or sales value between the three.
Within Cuervo, there are 3 different categories.
- Especial : Mainstream, i.e., their “value” product (not a 100% Tequila)
- Tradicional : Super Premium (100% Tequila, in production since 1795)
- Reserva de la Familia : Prestige (this is their “top” product, directly from the family’s private cellars)
Their other tequila portfolio is split as below:
- Gran Centenario : super-premium (#1 by volume in Mexico)
- 1800 : super- or ultra-premium, depending on the sub brand.
- Maestro Dobel : ultra-premium
Becle’s IR team indicated that for their global breakdown, they are roughly 50% mainstream (i.e., Especial) and 50% premium in terms of volume. However, when looking at sales value, they are slightly more skewed to the premium side.
Globally, tequila volumes have grown at a CAGR of 12.6% between 2017 and 2021. (IWSR), and 12.4% using estimates for the 2022 market.
- Notably, this is 2x the rate achieved by Becle’s Jose Cuervo line over the same period. (6.4%) However, Cuervo already has massive market share, so this is not quite a fair comparison.
- Becle’s Other Tequila portfolio grew at a CAGR of 12.2% over the period, matching the industry.
The IWSR states that tequila market share by volume in the global market has increased by 1.6x over the last 4 years from 1% to 1.6%.
This means that the global tequila penetration is only at 1/10 th of the current US level - leaving a long runway for growth.
The breakdown below, provided by IR with data from IWSR, clearly indicates that the industry is shifting from mixto tequilas, to more premium 100% Agave tequilas. This is “bad” for about 50% of Becle’s Tequila portfolio. “Bad” is relative. The entire industry is still growing. Mainstream is not shrinking, however its market share is.
Given that the US tequila market is the world's largest - I will spend some extra time here. The US represents around 70% of the global market by volume, and even more in terms of sales - which points to a higher average selling price than in Mexico.
Within the US Spirits market, Agave based spirits has been the fastest grower over the last 5 years, and the segment is expected to grow at 9% p.a. going forward. (Note – non-alc has been growing much faster, but has basically come from a non-existent base).
As seen in an earlier image in this article, Agave based spirits have increased their share of the pie from 7.2% in 2016, to more than 10% in 2021.
Competition
Competition in the alcoholic beverage industry is fierce, and most segments are dominated by a number of large players. While the beer industry is dominated by ABI and Heineken (HEINY), the spirits industry is led by:
- Diageo ( Don Julio , Casamigos , Johnny Walker, Tanqueray, Gordons, Smirnoff, Ciroc, Captain Morgan)
- Bacardi ( Tequila Patron , Tequila Cazadores , Bacardi Rum, Bombay Sapphire, Grey Goose, Martini) – Note: Bacardi is the world’s largest privately held spirits company.
- Brown-Forman ( BF.B ) ( El Jimador , Jack Daniels, Glendronach)
- Beam Suntory ( Sauza , Hornitos , Jim Beam, Maker’s Mark, Laphroaig)
- Pernod Ricard ( OTCPK:PDRDF ) ( Olmeca , Jameson, Glenlivet, Absolut, Chivas, Ballantine’s, Havana Club).
These are all large multinational conglomerates, with substantial financial means and distribution networks. When it comes to Tequila, however, they are all chasing Becle in terms of pure volume…
As of 2021, Becle had market share of 28.5% in the global Tequila market. 18% of this was Jose Cuervo, with 1800 and Centenario being the next biggest.
Bacardi’s Patron had the 2 nd largest market share overall, but on a consolidated basis Diageo’s #3 and #4 spots with Don Julio and Casamigos respectively, puts them in second spot overall.
I believe Becle’s decision to sell its 50% stake in Don Julio in exchange for Bushmills was a mistake. By then (±2014) – it was likely already clear to industry insiders that premiumization was a massive driver, and Don Julio was already the top-selling “ultra-premium” tequila in the US, according to Reuters . According to IR, aside from needing to premiumize, Becle also needed to diversify – and saw this as an opportunity to enter the Irish whiskey segment. At the time it was sold, Don Julio had around 590k cases globally – with Becle’s share being 250k. Their aim was to replace Don Julio with Maestro Dobel. He states that they reached that volume with Dobel within 2 years, and that it is currently is around 600k cases. Maestro Dobel currently has 0.4% market share in the US. Don Julio has 6.7%.
SWOT
Strengths :
Strong heritage
250-year history, and still majority owned and led by descendants of the original Cuervo family. They probably know tequila quite well by now. With this strong history comes familiarity and brand recognition. The name Jose Cuervo is synonymous with tequila.
Vertical integration & Scale
Aside from brand recognition, Becle’s level of vertical integration is probably their greatest strength. They are involved in the process from agave cultivation, through to product distribution. Because of this, Becle should theoretically be able to absorb cost spikes, like a surge in agave prices, much better. Smaller operations should fare worse. Becle should therefore be able to “outlast” smaller brands should the demand, and resultant high agave prices, continue.
Back in 2016, JPMorgan estimated that increasing vertical integration from 60% of own Agave requirements to 90%, could drive gross margin improvement of about 5-6%. This is based on their estimate that purchasing agave is roughly 3.5x as expensive as producing it. (IR indicated 2.5x in our call). The fact that Becle is the largest producer of Agave within the AOT should therefore provide them with an enormous competitive advantage and cost benefits. The expected margin expansion has not materialized, quite the opposite, in fact
While Becle has since stopped publishing how much of their own Agave requirements they produce, Morgan Stanley notes in February 2023 that the increase in their long-term biological assets probably indicate that they are making good progress w.r.t. insourcing more of their agave requirements.
The graph below points to a 2-year CAGR of around 50% in inventory, while sales over the period increased by roughly 14% p.a.
Becle also has competitive advantages from a distribution perspective. The control about 94% of their total volume through their own network, which should lead to better cost control and higher margins. Distributors will generally already have tequila offerings at all price points, so any new product that a small distiller might hope to get to market, has to offer something new or unique. Most bars are individually owned, and thus small brands will have to make and service thousands of different account connections if they try to bypass a distributor. This is not realistic.
Strong credit profile
Becle has a very good credit profile, and recently issued notes at lower rates than the Mexican sovereign debt rate. This is discussed later in Financial Performance Metrics.
Weaknesses :
Insider ownership
The Beckmann family have outright control of the company. While a large stake could be seen as a positive – aligning management interests with shareholder interests – insider ownership at Becle is large. The latest available numbers indicate that Juan Domingo Beckmann owns >51% of total shares (this has come down from 87% in 2020). This basically gives the family outright control over the company, and the power to stop any attempt at an acquisition, such as the one Diageo briefly explored in the early 2010s. The 2 nd biggest shareholder is Norges, with 1.24% of shares outstanding.
Low FCF Conversion
4 of the last 5 years have seen negative free cash flow. My model and assumptions lead to a FCF conversion rate of only around 40% in my final year. The lack of FCF over the last few years is due to an increase in CAPEX layouts and as well as increasing inventories.
Dependence on the US market
While they have operations all over the world, around 60% of sales and 70% of profits are generated in the US. Any changes to trade laws or new levies could potentially be damaging.
Share price volatility
In 2019, 2020 and 2021, the average monthly share price move was ±9%, ±13%, and ±9.5% respectively.
Opportunities :
Expansion in the ROW
Trends in the alcohol market often move from one region to another. It is possible that the tequila boom currently seen in the US could eventually move to other regions like the UK, EU, and Asia. Penetration in the ROW is currently only a 1/10 th of the those in the US.
Margin expansion
Stabilization of agave prices which have surged over the last couple of years should lead a much higher margin profile. Becle’s latest set of earnings (4Q22) saw margins increase by 200 bps to 57.5%, more in line with the margins seen in prior ears. For the last FY, gross margin also improved by 90 bps YoY to 54.9%, and 280 bps above the 2020 margin.
Threats :
Premiumization and competition
Jose Cuervo has traditionally operated mainly in the mid-tier product range, as opposed to the ultra- and super-premium range – which has been faster growing of late. Becle faces tough competition in the US in terms of premiumization, where brands that have been focussed on delivering a premium product from the start, such as Patron and Don Julio, have a big presence. There has also been a rise in the number of celebrities launching brands that immediately attract plenty of attention with little to no marketing required. This is one of the factors leading to high levels of consolidation in the industry. The most pertinent example of this is probably Casamigos – George Clooney’s tequila brand, which was only found in 2013, sold to Diageo for US $1 billion and now has >5% of the global market share and was one of the fastest growing spirits brands in 2022. The likes of Dwayne “The Rock” Johnson and Kendal Jenner have followed. The following was published about The Rock’s Teremana Tequila:
"With more than 640,000 9L cases sold in 2021, Teremana® Tequila has been the most successful launch of a spirits brand in U.S. history"
Changing consumer preferences
A few years ago there was a lot of noise around the expansion of the gin market. Today we are seeing something similar with tequila. However there is no guarantee that this will continue, or for how long. Tequila is not yet a global hit like vodka or Scottish whiskey– and there is no guarantee that it will become one.
FX Risk
Around 60% of Becle’s sales are USD denominated. Thus, any USD weakness/MXP strength would be a headwind for reporting in Mexico. The relative strength of the dollar due to aggressive rate hikes could lead to negative topline surprises over the next year or two as rate hikes come to a halt. Over the last 5 years, the MXP has actually appreciated vs the USD.
Moat
Becle has several factors contributing to a strong moat, but there are also some important factors that erode it.
Pros : Jose Cuervo is a global leader, and the name is synonymous with the tequila industry. Thus, its brand and heritage contribute to its moat. It also benefits from scale effects via its vertical integration and distribution network. Its position as the largest agave producer within the AOT should enable it to enjoy a better margin profile than peers.
Cons : Though one would think that there are significant barriers to entry, (capex for equipment, distribution network) there are cases that disprove this to a certain extent. Enough money and star power has propelled George Clooney’s Casamigos to be a top global player within 10 years, with almost half of Cuervo’s volume in the US. Tequila production is not protected by years of R&D development and complex IP.
I also do not believe there is a ton pricing power in the industry. Most brands push through annual inflation increases, but you certainly can’t go crazy – as there are numerous competitors at each level. The following extract from IWSR’s Mexico report also supports this:
“ Don Julio increased its prices massively, which prompted consumer pull-out, especially in the last quarter of 2021 ”
I believe premiumization efforts might also be restricted by this, as Becle has a large presence in the more “value” based portion of the market. It will be hard to elevate this.
They do, however, control the lion’s share of the global tequila market.
Forecasts and Valuation
I've calculated a FV for Becle using 2 different methods. A summary of the inputs and results is provided below:
- US volume CAGR -0.5%; Mexico vol CAGR constant; ROW vol CAGR +1%.
- Sales/volume CAGR in the US and ROW +0.5%; Mexico -1%.
- Gross margins in all regions recovering to average of 2017/2018 levels.
- US avg AMP/sales increases 1%. Mexico -2% to be more in line with current levels, ROW at avg.
- Distribution/sales continues at average for all regions.
On a relative basis, Becle seems to be fairly undervalued, and a belief in simple reversion to the mean would result in a 25% return. Some context is required here, as this a weak argument on its own. Becle only listed in 2017, and thus for a large part of its existence, markets have been fairly expensive.
The decline to its current forward P/E (white) puts it much more in line with its larger peers like Diageo (green), Pernod Ricard (brown), and Heineken (dark blue) as can be seen from the graph below. The notable standout is Brown-Forman (light blue), which is currently trading on a BF P/E of more than 30x. (Note: these are all adjusted P/E Ratios.)
However, given Becle's superior expected growth vs peers, this does mean it is trading on big discount based on its PEG Ratio:
BB Best PEG | |
Becle | 0.83 |
Diageo | 2.34 |
Pernod Ricard | 1.82 |
Brown-Forman | 4.16 |
Heineken | 1.97 |
Conclusion
While Becle might not be the best placed player to capitalize on ultra premiumization segment of the market, it is still - as the world's largest tequila brand and all the scale benefits that comes with this - very well positioned, with 25% upside, to capitalize on the global increase in tequila consumption.
For further details see:
Becle: The Mexican Tequila Titan